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August 14, 2012

Want to Save on HNW Clients’ Home Insurance? Raise the Deductible

In the investing world, higher returns over the long term are usually associated with accepting higher risk. A similar rule works in home insurance. Assume more responsibility for risk in the form of a higher deductible, and you can save tens of thousands of dollars over the long term, even when you factor in the likelihood of paying the higher deductible amount after a loss.

Surprisingly, many wealthy families fail to take advantage of this savings opportunity. Based on an ACE survey of 600 agents, 78% said affluent families were likely paying too much in premiums by carrying a low deductible, such as $500 or $1,000. Ironically, when families are faced with a minor accident that slightly exceeds their low deductible, many refuse to file a claim. Fearing a rate increase, they decide to pay for the repairs entirely out of their own pocket, a relatively affordable expense for them. Instead, these families should first consider how much they can pay without significantly affecting their lifestyle. Then their agent can estimate the premium savings they could achieve with a range of deductibles up to their maximum amount, allowing the family to assess the trade-off between risk and savings.

The savings can be substantial. For instance, the annual savings in premium for insuring a $1 million home with a $2,500 deductible versus a $500 deductible could be about $900. On a $3 million home, increasing the deductible from $5,000 to $10,000 could save the family about $1,800 annually.

As the table below illustrates, these savings build up year after year and soon outweigh the risk of having to pay the difference between the low and high deductible. If the family goes only two years without a loss and is forced to pay an extra $5,000 due to the higher deductible in the third year, they will have already saved $5,400 in premium. They’re ahead $400. Considering that the typical home ACE Private Risk Services insures experiences a claim only once every 21 years, the family has a reasonable chance of saving almost $33,000, or even more.

Some companies such as ACE also offer disappearing deductibles in which the deductible amount drops by a dollar or percentage amount for each year the client goes without a claim. In ACE’s case, the effective deductible on a first loss after 10 claim-free years could be zero.

The family can further stack the odds in their favor by installing safety systems in the home to minimize the frequency and severity of loss. For example, water damage accounts for 24% of the cost of all homeowner property losses, according to 2007-2010 data from SNL and ISO. Yet water damage is very preventable. By installing an automatic water leak detection and shut-off system, affluent homeowners can prevent or minimize up to 93% of the cost of water damage, according to an ACE study. Water leak detection and other loss prevention systems also offer the benefit of additional savings. The combined credits for such systems can exceed 30% of the base homeowners policy premium on top of the savings from the higher deductible.

Insurance companies such as ACE that cater to wealthy families offer such deep discounts for a number of reasons. Families who assume more risk for small losses through a higher deductible are more likely to be careful and install safety systems throughout their homes. As a result, they usually suffer fewer losses, both large and small. It’s a win-win situation for both the client and the insurance company.

What to do with all those savings? Insurance agents experienced at working with high-net-worth families will often advise using at least a portion to address areas where the families are typically underinsured, such as liability lawsuits or extensive jewelry, art, and wine collections. By absorbing more risk for easily affordable losses to fund better coverage against catastrophic losses, the family can enhance wealth protection often at no additional cost.

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For more details on how high net worth families and their advisors can use easy savings opportunities to improve protection and maximize the value of their insurance program, watch our series of videos at www.aceprs.com.